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Trapped in the Mobile Bubble

Opinion: Tempting as it is, don't get too comfortable in the mobile networks bubble, because a big bang may be coming when it bursts.

Ever watched one of those "games" where you swat a penguin, and its mutilated cartoon body bounces along the snow? For Penguin, read "mobile operator" and you have a great idea of the pickle were in.

Right now, stocks in mobile networks are worth money. You can buy, and sell them. And of course, people who own networks can sell shares.

So if you believe (as I do) that theres going to be a big bang as the bubble bursts, the problem is not easy to solve, because you cant get out of comms right now.

Take one of my failed predictions. Around nine months ago, I forecast that Chinese-owned Hutchison "3" would go IPO around now.

Youll notice that as of todays date, there are no share offerings for "3" either in the UK, or in Italy. And yet if you check the valuations—as seen by the stock markets—of Hutchisons European 3G carrier, youll also notice that its well over $13 billion.

Why, you can buy three, nearly four Skypes for that sort of cash! Why arent the shares on offer?

One possible explanation would be that Hutchison never planned to go public with "3"—and if you are happy with that explanation, you need distress yourself no further.

Me: I have discovered that people who put up capital tend to want return, and from my reading of the books, "3" isnt going to return that investment in dividend form.

It has to be an IPO. And of course, thats what will happen, next year, or maybe even 2007.

The explanation (as one insider put it at a recent mobile phone show) is that we have a classic South Sea Bubble.

There are companies in the mobile phone business which have a valuation based on, well, what they will sell for.

And of course, the people who arrange these things have no interest in being realistic. They get a percentage of the sale price: the higher the sale price, the more they get.

We watched the brokers play this game right through the dot-com bubble, and they did very nicely out of it. The rest of us lost our pensions. So shall it be again, until the bubble bursts; the brokers will keep their percentages, and the rest of us will lose our trousers.

But the question is: when?

Candidly, many of us are starting to wonder just how long this bubble can defy gravity.

It was obvious five years ago that the whole 3G dream was going to turn into a nightmare. To technically competent people (I talk to them, Im not one of them!) it was actually obvious around the time the WCDMA standard was being turned into a political toy, which was at least half a decade earlier.

But reality (we thought) must penetrate even the most obtuse mind after a while. And look at the revenue trends. Surely, its obvious?

Apparently, no. And the secret of the extra hot air, it now emerges, is the VOIP (voice over IP) bubble.

On the face of it, VOIP is the end of toll calls. The world is moving to flat rate broadband; voice goes over the Internet and no call costs any more than any other. Bang goes per minute charging, right?

Eventually, yes. But right now, the paradox seems to be that the VOIP growth is actually in small, outlying areas which long for respectability—and for them, respectability is a PSTN (Public Switched Telephone Network) number.

Actually, thats also a useful source of revenue. And with the relative size of PSTN against VOIP still heavily overbalanced towards the plain old telephone system, every new VOIP entrant actually bolsters the enemy it is trying to overthrow.

Weve watched Yahoo make its plans; it is doing deals with every Telco in Europe. Google and Google Talk looked like a threat—many observers like Om Malik and myself really thought Google would be the one that would buy Skype, in fact—and were now watching gossip suggest that big media empires will want to get into the "presence" business too.

It makes a lot of sense. The trouble is, it doesnt make long-term sense. And so, the important question is when the tipping point arrives, and when the see-saw which has kept the rain off the mobile telcos suddenly turns into the hammer which drives them into the ground.

Right now, my gut tells me 2007 is when it starts to be possible. Id hang onto any telco shares (except in turkeys!) without fear till then.

But after that, Id make sure I was ready to move out as soon as VOIP traffic to the home reaches the point where the telcos are more afraid of losing it than the VOIP gang is of losing PSTN connections.

Last time I talked to Niklas Zennström about this, he reckoned it was "months rather than years" away. He may be right. But things are always slower than you think; it could well take to beyond 2008.

Just dont get complacent and think things can carry on the way they have. Thats the sort of thinking that gets burglars into jail with 35 counts of larceny.

You have to realize that the longer you do something stupid, the more certain you are to get caught.

Contributing columnist Guy Kewney has been irritating the complacent in high tech since 1974. Previously with PC Mag UK and ZDNet UK, Guy helped found InfoWorld, Personal Computer World, MicroScope, PC Dealer, AFAICS Research and NewsWireless. And he only commits one blog—forgiveable, surely? He can be reached at gkewney@yahoo.com.

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